Chaveznomics: Venezuela's Private Sector Under Siege

13.09.05 | Expropriations, retroactive tax hikes and Marxist rhetoric are raising concerns among local and foreign investors in Venezuela. With oil revenues at record levels, Hugo
Chavez is stepping up his attacks against private capital.

Venezuela's president Hugo Chavez is riding high these days. International prices for oil, Venezuela's top export, has hit new highs after months of continued increases.

Last week Chavez visited the Jamaican resort city of Montego Bay, where he signed the formal agreement to create PetroCaribe, a new alliance of Caribbean nations that will receive Venezuelan oil under below-market terms. He has announced similar pacts in South America. And at home, the economy is seemingly booming. Venezuela's GDP grew by a whopping 17.4 percent last year, the highest rate in Latin America and the highest level in Venezuela in more than 25 years. During the first half this year it grew by 9.3 percent and the UN Economic Commission for Latin America and the Caribbean (ECLAC) forecasts that Venezuela's total GDP will grow by 7.0 percent this year, again the highest rate in the region.

"When oil prices increase, the government invests heavily, creating an economic stimulus and thus economic growth," says Pedro Palma, head of the MetroEconomica consultancy in Caracas. "However, that growth cannot be interpreted as a favorable investment climate. On the contrary, there's a hostile policy against private investment with expropriations, invasion of private property and propaganda saying that private activity is contrary to the good of the country."

In addition to a series of expropriations, Chavez has recently increased his attack on private and foreign investors in Venezuela through retroactive tax hikes and calls for renegotiated contracts.

A week ago - Monday, September 5 - military troops seized a Heinz tomato processing plant in Monagas state. The plant had not been operating for years because of a dispute with local tomato growers.

Heinz has asked for the factory to be returned, but Chavez has said earlier that he would expropriate any land or factory that was not operating and hand it over to workers.

On August 31, military troops led by Agriculture Minister Antonio Albarran seized grain silos in the state of Barinas that belonged to Alimentos Polar, the largest brewer in Venezuela. Polar is fighting the measure and has filed a motion with the Constitutional Court of the Supreme Tribunal of Justice claiming that the action is illegal.

"It's as if you have three rooms in your house and one becomes vacant because your son got married," Guillemo Bolinaga, legal affairs director of Polar said in an interview with El Universal newspaper Sunday. "You decide what to do with that room,
whether to keep it vacant for when your son comes to visit or convert it into a dining room. The fact that this room is vacant doesn't mean that the house is vacant and much less that any one else can interfere without permission."

Similar expropriations have taken place recently of facilities owned by Italian milk producer Parmalat and the locally-owned valve factory Inveval, steel company Sideroca Proacero, meat packing company Fribarsa and paper plant Invepal.

Authorities are now looking at another 700 facilities that may be confiscated, government officials have said.

"As a response to the attacks from neo-liberalism and capitalism, we are now going to use the mechanisms of workers," Marcela Máspero, coordinator of pro-government National Workers' Union (UNT), recently said."We seize the plant first, and then try to solve the issue of ownership, as there is always a reason for takeover," she said, according to El Universal.

Fedecamaras, Venezuela's main business federation, denounced the expropriations.

"These actions constitute a clear violation of the fundamental rights of man, as stated by the United Nations, as well as the rights to property, economic liberty, the defense and due process of private enterprise, guaranteed in the Venezuelan constitution," the business group said in a statement last week. "They also negatively affect employment and the income of hundreds of families and small agricultural producers."

The recent expropriations came after the government seized a 32,000-acre ranch owned by British food producer Vestey Group in January. Vestey disputes that its ranch was idle and is fighting to get it back.

The action against Vestey has had a negative effect on how British investors view Venezuela, according to Ian Stein, executive director of the Venezuelan-British Chamber of Commerce in Caracas.

"This is very negative," he says. "The repercussions are not favorable."

The expropriations come on top of other measures that have caused concern among local and foreign investors.

On August 12, Venezuelan tax authorities closed down the Lake Maracaibo office of British-Dutch oil giant Shell for 48 hours and froze company assets equivalent to $131 million. The authorities claim that Shell owes that amount in back taxes, a claim the oil company denies.

At the same time, the government is renegotiating several exploration agreements with foreign oil companies, demanding larger state ownership and royalties. ExxonMobil is fighting the changes through international courts.

Chavez is also increasing his control over the country's banking sector. Private banks now have to lend at least a third of all their loans to agriculture, micro, tourism industry and mortgage clients at below-market rates.

Forcing banks to lend in sectors where they have no expertise is dangerous, warns Oscar Garcia Mendoza, president of Banco Venezolano de Credito. Combine that with possible invasions of homes that have been financed by banks and depositors will end up losing, he said in an interview with El Universal last week.

The restrictions have led to a 12 percent drop in bank profitability during the first seven months this year, according to Bloomberg.

Meanwhile, the central bank's autonomy was considerably weakened when lawmakers voted in July to reduce its international foreign exchange reserves in order to finance social spending programs. At the same time, the government created a new state bank, Banco del Tesoro, that will handle all its financing needs, including managing debt payments and debt issues. The move is expected to weaken the central bank further as well as affect Venezuela's private banks, which have traditionally had high levels of business with the government.

"The impact has been devastating," Carlos Raul Hernandez, an analyst with Venezuelan think-tank CEDICE, says of Chavez' economic policies. "As of December 2004, in the past six years 65 percent of companies have gone bankrupt, about 60 percent of the labor force are now in the informal sector and there's an open unemployment of 15 percent. The productive sector has been destroyed."

Foreign direct investment last year reached $1.1 billion, less than half of the level the year before and more than three times less than the average annual level in the 1996-2000 period, according to ECLAC.

And the recent GDP growth comes after the economy fell by 8.9 and 7.7 percent respectively in 2002 and 2003 - the worst economic declines in more than 25 years.

As a result, poverty is growing - from 43 percent during the first half of 1999 to 54 percent in December 2004, according to the official National Statistics Institute (INE). Extreme poverty - defined as living on less than a dollar a day - has gone from 16.6 percent to 25 percent in the same period.

"I'm debating whether they are some very incompetent individuals...or believe that they're [implementing] a socialist experiment that failed in other countries."
Oscar Garcia Mendoza, president of Banco Venezolano de Credito, in El Universal.

Another negative development is the continued high level of inflation. Last year, it reached 21.7 percent. This year, the International Monteray Fund expects it will reach another 18.2 percent before growing to 25.0 percent next year. Both forecasts represent the highest inflation estimates for Latin America this and next year.

Chavez' economic policies have created more dependency than ever on oil income, a situation that will have severe consequences when international oil prices start to fall, warns Palma. "We're now seeing a bonanza, but what will happen when prices stabilize, not to mention fall? It could create a severe crisis," he says.

While the Venezuelan state may be the locomotive of the economy, it cannot be the only player, Palma says. "Private investment is fundamental. It creates permanent jobs, which is what Venezuela needs most right now."

However, even with a potential crisis as a result of falling oil prices, Chavez will likely be able to keep his hold on power, predicts Jose Luis Cordeiro, a Venezuelan economist and author of The Great Taboo, a book on the nationalization of Venezuela's oil industry.

"When problems arise, Hugo Chavez will blame the USA, globalization and economic imperialism," he says. "He's an expert in demagoguery and populism, and he will always find a scapegoat to blame for his own failures."

Case in point: While the state of Aruagua has one of the largest unemployment rates in Venezuela, after most factories have had to close down, Chavez continues to have considerable support there thanks to blaming the unemployment not on his own policies, but greedy capitalists, Cordeiro says.

The attacks against private capital comes as Chavez is solidifying his political power. After a series of massive protests in previous years, the opposition now seems subdued. Business and labor leaders that previously led the opposition against Chavez have gone into exile. José Luis Betancourt, recently elected president of Fedecaramaras, has emphasized dialogue over opposition.

At the same time, Venezuela's media has been restricted through various new laws as well as constant physical attacks by Chavez supporters. Freedom House has classified Venezuela as "partly free" due to restrictions on political and civil rights, while the Heritage Foundation has classified the South American country as "repressed" in its latest survey of economic freedom worldwide. That's the worst category in the survey and thus placed Venezuela among countries like North Korea, Zimbabwe, Iran and Cuba.

Some observers see parallels with both Cuba the first years after the 1959 revolution and Chile during the 1970-73 presidency of Marxist Salvador Allende. However, Hernandez disagrees.

"In the case of Allende, you had take-overs of factories and ranches, but he didn't have total control over the institutions," he says. "The [Chavez] government has full control."

As opposed to the beleaguered media, business organizations and opposition unions, the government can count on a loyal majority in both the national assembly and the country's supreme court.

And unlike Cuba's leader Fidel Castro, Chavez understands that he needs to keep up some semblance of democracy, Hernandez says.

However, like his counterpart in Cuba, Chavez may yet remain in power for many years. After changing the constitution in 2000, he was able to successfully run for a six-year term in elections that year. A referendum last year called by the opposition gave Chavez a majority, according to official results. The opposition disputes those results.

In any case, at this point there are no strong opposition candidates that threaten Chavez' re-election nex year. And that likely means he will continue with his current economic policies in the future as well.

"Hugo Chavez can maintain his policies for many, many, many years," Cordeiro says. "The example is Cuba and Fidel Castro is his mentor."